A revocable trust, often called a "living" trust, is a means of structuring the legal ownership of assets to: (1) set forth the distribution of the assets of the person or persons who formed the trust — called either settlors, trustors, or grantors — after their deaths and (2) avoid probate.
What Is A Trust?
A trust is a legal arrangement whereby one or more persons — called trustees — hold legal title to property for the benefit of another person or persons — called beneficiaries. In the case of a revocable living trust, at least initially, the trust settlors are also the trustees and the beneficiaries of the trust.
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In the context of a living trust, title to the settlors' assets, which would otherwise be subject to a judicial process called probate, are transferred to the living trust. Because the trust is revocable, the settlors have full authority to buy and sell trust assets and essentially do with the trust assets as they please, as if the trust didn't exist.
What Is Probate?
Probate is a judicial process during which: (1) the decedent's assets that are subject to probate are gathered, (2) the decedent's creditors are paid, and lastly (3) the decedent's assets, if any, are distributed pursuant to the terms of the decedent's will.
In Arizona, this probate process requires, among other things, filing a petition with the probate court to appoint a personal representative — usually nominated in a person's will and called and executor or executrix in other states — who will oversee the aforementioned three steps — gathering, paying, and distributing — inherent in the probate process.
Assets Not Subject To Probate:
- Assets held in joint tenancy or as community property with right of survivorship;
- Payable on death accounts;
- Transferrable on death accounts;
- Life insurance; and
- Employee benefit plans.
Assets Subject to Probate:
- Separate property, titled in the decedent's name; and
- Property held as tenants in common, titled in decedent's name.
The preceeding lists of non-probate and probate assets are not exhaustive.
Transfer of Title
Once a revocable living trust has been formed, title to the trust settlors' assets that would otherwise be subject to probate must be transferred to the trust. In addition, beneficiary designations can be changed to from individuals to the trust so as to make the post-death disposition of any such assets subject to the distribution terms set forth in the trust.
If title to assets, which would otherwise be subject to probate, is not transferred to the trust, then probate will likely be required if the value of the settlor's assets exceeded the small estate affidavit limits, which vary from state to state. In Arizona, these limits are currently $75,000 of personal property and $100,000 of real property.
After the death or deaths of the trust settlor or settlors, at least one successor trustee is generally empowered, pursuant to the terms of the trust, to continue holding the assets in trust or distribute the trust asset pursuant to the terms of the trust. In contrast to probate which requires the court appointment of a personal representative, the successor trustee or trustees don't generally need to be appointed by the court in order to act. This transition of authority from original trustee(s) to successor trustee(s), or more particularly the speed and simplicity of this transition, is perhaps the single biggest reason that people choose to form a living trust as opposed to making a will. In effect, it is this transition that avoids probate, if the assets of the settlors are either titled in the name of the trust are or held in such a manner as to avoid probate, such as holding real property in joint tenancy.
This brief overview of some important considerations associated with arizona living trusts is by no means comprehensive. Always seek the advice of a competent professional when making important legal decisions.
Steve Cook is an estate planning lawyer at Cook & Cook. Although his office is located in Mesa, Arizona, he represents clients throughout the Phoenix, Arizona Metropolitan area including the following east valley cities: Scottsdale, Paradise Valley, Tempe, Chandler, & Gilbert.